CRYPTOCURRENCIES

Wild, Wild East: Why the ICO Boom in China Refuses to Die

For many people involved in the international crypto space, the idea of throwing valuable Ether tokens at comically named blockchain projects in anticipation of unworldly profits now seems a laughable and distant memory. 

There is little doubt that what we experienced with the 2017-2018 Initial Coin Offering (ICO) mania was a once-in-a-generation phenomenon, the somber aftermath of which will perhaps live longer in the memory than the euphoria of December 2017. 

In hindsight, one cannot help but wonder how investors were naïve enough to believe in all those grandiose claims of blockchains solving every imaginable problem in the world, or how they thought they could get into an ICO token listing early and get out in profit with impeccable timing.

While the crypto industry in the West has seemingly matured since those wild days, with a growing focus on institutions and innovative trading products, the landscape remains quite different in China. 

Despite all the lessons learned from 2017-2018 and growing sophistication among retail investors, various crypto-related Ponzis, MLM schemes, and pump-and-dumps are still very much alive in China today. Even for a seasoned observer of the China crypto scene who has seen the recurring themes, this can still be baffling. Considering the magnitude of some spectacular Chinese exit scams such as PlusToken, Wotoken, and the Fcoin debacle, one cannot help but wonder – when will people learn?

Scams aplenty

Matthew Graham, the Beijing-based CEO of Sino Global Capital, regularly decrypts the Chinese crypto scene for Western Twitter users:

“Although the situation has improved somewhat, it’s unfortunate that scams and Ponzis are still a common feature of the China crypto ecosystem”, says Graham. “Many of these schemes are regional in nature, are associated with veterans of China’s P2P and MLM industries, and feature common players. The largest scams such as PlusToken make international headlines, but there are many more examples. 

For instance, an alleged scam called V-Dimension (or VDS) claimed to help users create ‘passive wealth flow.’ VDS marketed itself with a ‘V for Vendetta’ theme, complete with masks and cheesy music and lines. Keeping with the theme, ‘investors’ had to use the Tor network to access the project’s whitepaper. This VDS project even is listed on a fairly popular China-centric exchange, but needless to say it hasn’t gone well.”

Graham’s sentiment is echoed by others who are familiar with the crypto scene in China. Mr. Z, a formerly active crypto speculator in Shanghai who asked to remain anonymous, explained that “In China, we often see two main types of scams, one being illegal MLM schemes such as PlusToken, and the other being malicious pump-and-dump ICOs like many of the no-name tokens out there. 

The situation today is already a lot better than a couple years ago, with there being way fewer ICOs and it being more and more difficult for token issuing project teams to make money. Although you can still find retail investors who are interested with the hopes of making a quick buck, these people are now few and far in between compared to back in 2018.”

Chive talking

In China, the retail “bagholders” who lose money via misplaced speculation or MLM/P2P lending exit scams are pejoratively known as “leek/chives” (韭菜), and when schemers dump their tokens on these speculators the act is known as “chive cutting” (割韭菜). 

This endearing terminology is derived from the fact that when you chop off the tip of a chive, it will soon grow back again; just like the wave after wave of retail speculators driven by greed and desperation.

Mr. Z described these people as becoming increasingly elusive. “New ‘chives’ in crypto are harder and harder to find now, and a lot of the people who are still buying ICOs today are actually older ‘chives’ who either made or lost money previously who are still holding out hope for one more lucrative opportunity.

In the meantime, many of the newer MLM schemes have now moved to the third and fourth tier cities, targeting forty-plus middle-aged people with savings who understand very little about blockchain technology or the financial markets, but are still prone to being lured by the promises of quick and guaranteed returns. These ‘chives’ will typically spread the message by word of mouth with their friends and relatives, to bring more people onboard.”

Insights from Graham and Mr. Z, combined with my own experiences, paint a clearer picture of the reality in China’s crypto scene. China is a large country with significant regional divides not only in culture, food, and habits, but in the dissemination of information. The highly guerilla and agenda-driven nature of China’s crypto media space means that for many retail investors it is nearly impossible to distinguish the good information from the bad. KOLs and WeChat-based syndicate groups are very common, not dissimilar to the syndicates and paid trading groups that flourished during the peak of the ICO bubble in the West.

A while ago, an anonymous interview (in Chinese) about the inner workings of Chinese ICO market makers shed light on a business not well known to the public at the time; but the interview was quickly redacted from many crypto media publications. The lack of objective information, coupled with innate human greed and a culturally embedded appetite for speculation, seem to combine perfectly to elongate the lifespan of shady crypto projects in China.

Why ICOs Remain Popular in China

But what, specifically, is so innate to China that it drives this unquenchable appetite for speculation? For a clearer picture I spoke with Nick Niu, who is in charge of China business development for Blockstream. Niu is a Chinese citizen with a Western education, who has spent some years investing in both traditional financial instruments and crypto assets.

“First of all, Chinese retail investors not only have a huge appetite for speculating on crypto, but on all manners of assets. More accurately speaking, all manners of assets that may have the potential for asymmetrically high returns. From the early days of buying A-shares, to speculating on Pu’er te